Avid Bioservices Inc (CDMO) 2016 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Peregrine Pharmaceuticals fourth-quarter, year-end fiscal year 2016 financial results conference call. (Operator Instructions)

I would now like to hand the call over to Mr. Tim Brons of Peregrine's Investor Relations group. Please go ahead, sir.

Thank you. Good afternoon and thank you for joining us. On today's call we have Steve King, President and Chief Executive Officer; Paul Lytle, Chief Financial Officer; Rob Garnick, Head of Quality and Regulatory; Joe Shan, Vice President of Clinical and Regulatory Affairs; and Jeff Hutchins, Vice President of Preclinical Research.

Today our team will be providing an overview of the Company's operations and progress, spanning Avid Bioservices' contract manufacturing business as well as our clinical, preclinical, and corporate activities. After our prepared remarks we will welcome your questions.

Before we begin I'd like to caution that comments made during this conference call today, July 14, 2016, will contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 concerning the current belief of the Company, which involves a number of assumptions, risks, and uncertainties. Actual results could differ from these statements, and the Company undertakes no obligation to revise or update any statement made today. I encourage you to review all of the Company's filings with the Securities and Exchange Commission concerning these and other matters.

With that I will turn the call over to Steve King.

Thanks, Tim, and thanks to all of you who have dialed in and to all of you who are participating via webcast today. Today, with the filing of the 10-K, is a good opportunity to take a look back over the past year, a year at Peregrine that was marked by surprising highs and unfortunate lows.

Leading the highs was the continued remarkable growth of our biomanufacturing business, Avid Bioservices, which is truly growing at a faster rate than even we expected; and of course the low coming with the early discontinuation of our Phase III SUNRISE study based on passing the futility threshold at its first interim data analysis. That development was a particularly bitter pill to swallow for everyone that had put in such a phenomenal effort to advance the program up to that point.

So following the setback we took the opportunity to take full stock of the Company, including evaluating our key assets, identifying opportunities for development, and strategic approaches for financing the Company going forward with the same ultimate goal of helping patients with devastating diseases while growing shareholder value. Out of this careful analysis we have settled on a strategy to focus the Company's resources primarily on continuing to grow our biomanufacturing business, Avid Bioservices, while continuing to advance R&D efforts through smaller clinical trials and the development of new technologies that can be partnered at an early stage.

With the goal of becoming cash flow positive over the next couple of years, this strategy will allow us to increase shareholder value in several ways. First, grow the value of our base, namely, our manufacturing business. Manufacturing companies are currently in high demand, with values ranging from 2 to 5 times sales, depending on the revenue growth potential.

We believe Avid should be highly valued from a shareholder perspective based on the current consistent year-over-year growth, almost a 40% compounded annual growth rate over the past five years, with a remarkable 66% growth this past year, all coming from one facility. With a second facility now in full operation, already booked into next year, adding to the revenue growth potential for this fiscal year, with planning already underway for a third facility that would be commissioned and ready for production in the first half of next year, setting the stage for nice potential growth going into the following fiscal year. Taken together, these three facilities have the potential to generate in excess of $110 million in revenue, with even more potential upside coming from the possibility of expanding our service offerings and, of course, the success of our commercial clients.

So by focusing our resources on growing Avid revenues we simultaneously add to shareholder value in two ways. We increase the value of the base business; and increasing revenues decreases our need to raise funds through the equity markets, with the goal being to become cash flow positive, potentially eliminating the need for future dilution.

We are a unique position as a contract development and manufacturing organization, or CDMO, because we have both drug development and manufacturing expertise. We already work with clients ranging from small startups to some of the biggest pharma companies, and we look forward to helping more clients bring their important products to the patients that need them.

Concurrent with growing our manufacturing business, we will also continue to leverage our PS=targeting platform in two ways. First, the Company will continue to extract critical data from the SUNRISE Phase III trial. While trial enrollment was discontinued, the trial is still ongoing, with some patients still receiving bavituximab maintenance therapy.

In addition, we have collected thousands of samples that are or will be analyzed in order to identify those patients that received benefit from including bavituximab into their treatment regimen. We expect this data will be instrumental in guiding the advancement of bavituximab in combination with immune-stimulating therapies.

In fact, it is very prudent to understand as much as we can from the SUNRISE trial before pushing into future Company-sponsored studies, whether alone or with our collaborators. Joe will discuss these efforts during his prepared remarks.

In addition to the bavituximab program, which continues to have tremendous potential value, the Company announced earlier today that it has licensed in a novel PS exosome technology with the potential to detect and monitor cancer at an early stage through a simple blood test. I recognize that some of you might think this seems contrary to controlling spending as we move toward profitability. But in fact, we believe that given our already existing knowledge base in targeting PS and our already available infrastructure for developing and validating tests, that for a very modest capital investment we can quickly reach proof-of-concept with a goal of partnering the technology, which could then bring in additional revenue. With another potential upside of the technology being that it can possibly be useful in the continued development of bavituximab, Jeff will talk more about this during his prepared remarks.

We believe the strategy of R&D targeted toward early partnering will allow the Company to continue its research and development activities, with significant upside coming from partnering as we move toward profitability. With that I will turn the call over to Rob, our Head of Quality and Regulatory, for a few thoughts on his perspective of the potential for growing our base CDMO business. Rob?

Thanks, Steve. I believe that Avid Bioservices is uniquely positioned in the CDMO industry and offers many clients the perfect opportunity to bring significant development expertise to bear on early development through late-stage biomanufacturing projects. In my experience, many biotech companies suffer from the inability to find CDMOs who fully understand their needs, are flexible, and can really deliver products in a timely and high-quality manner.

Avid is designed and is now capable of delivering on all of these fronts. This also opens the possibility of bringing Avid's manufacturing expertise to bear on potential drug development partnering opportunities as they may arise.

This concludes my remarks, and I would now like to turn it over to Jeff Hutchins. Jeff?

Thanks, Rob. I'm very happy to be able to discuss a number of exciting developments in our preclinical group. First, as Steve discussed, we have executed a licensing agreement with UT Southwestern Medical Center for a novel exosome technology. While many of you are familiar with exosomes, I'll provide a brief overview for those who are not.

Exosomes are cell-secreted vesicles -- or mini-cells, if you will -- that are present in nearly all bodily fluids including blood. Likewise, tumor-derived exosomes represent small pieces of tumor cells that are released into the blood as tumors grow. As well, these tumor-derived exosomes have phosphatidylserine, or PS, on their surface as a marker and can also contain DNA, RNA, and proteins as markers of malignant disease.

It is believed that even small tumors begin to release PS-positive exosomes. And thus the ability to detect these exosomes in the blood may be an indicator of presence or progression of a tumor.

The licensed technology is designed to detect and monitor PS-positive exosomes in a patient blood sample, providing clinicians with detection and monitoring information regarding the presence and prevalence of cancer. These exosomes have PS flipped to the outside of the surface and demonstrate immunosuppressive activity, just as we find with tumor cells.

Preliminary studies have demonstrated that the levels of PS-positive exosomes present in the blood of cancer patients are higher than levels found in the blood of healthy volunteers. Furthermore, study findings also suggest that there is a correlation between the level of PS-positive exosomes that are detected in the blood of cancer patients and the severity or extent of their disease burden.

Given our in-house expertise in PS targeting, we believe that we are uniquely qualified to advance this technology. As Steve stated, there are significant opportunities to use this technology as both a complementary tool in bavituximab's ongoing development, which Joe will address later, as well as more broadly as the basis for a novel cancer detection and monitoring test kit that will be the focus of our partnering efforts.

It is our goal to develop, optimize, and validate a functional detection and monitoring assay capable of detecting PS-positive exosomes from a simple blood sample. And given the Company's extensive experience in developing assays of this type, we do not anticipate the need for added personnel or any specialized equipment for this project.

Once we have successfully validated this assay we plan to establish proof-of-concept through an efficient preclinical and clinical testing program. We have no intention of conducting further development work beyond the proof-of-concept stage. Rather, we expect to initiate partnering discussions for commercialization of this program in 2017. We are very excited to begin this work on this new program, and we'll have more detail to offer in the coming months.

I'd now like to provide an update on Peregrine's preclinical IO focused collaboration with the Memorial Sloan Kettering Cancer Center. Our goal of this collaboration is to evaluate combinations of bavituximab with other checkpoint inhibitors and immunostimulatory agents for the purpose of developing new and increasingly effective anticancer treatments.

This program is advancing well, and to date we have seen initial signs of activity with new combinations with bavituximab and other treatment modalities such as checkpoint blockers, T-cell agonists, and radiation. Our plan is to spend this next year investigating these potential combinations, and we understand that initial results from this collaboration will be presented at scientific conferences later in the year.

This concludes my comments, and I will turn the call over to Joe Shan, Vice President, Clinical and Regulatory Affairs, who will further discuss our new exosome program as well as the Company's other clinical activities. Joe?

Thanks, Jeff. I'd first like to comment on our new exosome program. One of the most exciting aspects of this technology is the potential synergy that it offers with our bavituximab clinical development program. Through our ongoing work with bavituximab, we have gained significant understanding of PS-mediated immunosuppression in cancer.

The availability of a PS-specific biomarker which can be implemented in our planned future bavituximab clinical trials aligns nicely with our refocused bavituximab development strategy, aimed at generating the most meaningful data possible from small early-stage clinical trials that support partnering efforts. We're very anxious to bring this new technology to Peregrine, and we look forward to the value it brings to our bavituximab program.

Let me now provide a brief update on the Phase III SUNRISE trial. At present we are continuing to conduct a thorough evaluation of the available clinical data and are testing the numerous biomarker samples collected, in order to determine if certain subgroups or patients with other characteristics benefited more from bavituximab treatment. We believe such information could be critical in helping guide the bavituximab clinical program, including our collaborations with the NCCN, AstraZeneca, and other clinical collaborators.

Meanwhile, we continue to collect additional data even as the trial winds down over the coming months. It's important to remember that at the time of patient unblinding, those who were still receiving study treatment were given the option of completing their chemotherapy. And those patients assigned to the bavituximab arm were given the option to continue receiving bavituximab if the investigator believed it is in the patient's best interest.

Because IO agents can elicit delayed responses and prolong survival, we are continuing to follow these patients to evaluate their outcomes. Such information may provide -- inform future decisions for the Company, and it is our plan to present our findings from the SUNRISE trial when the evaluation is complete.

Looking ahead, our priority is to generate clinical evidence of bavituximab's ability to improve patient outcomes when combined with immune-stimulating therapies. We believe our collaboration with the NCCN will play an important role in achieving this goal.

The purpose of this collaboration is to expand the Company's ongoing clinical research and development of bavituximab for the treatment of a range of tumors. I'm pleased to report that the NCCN research collaboration is advancing according to plan, and selected trials are expected to be initiated by the end of calendar 2016 or early 2017.

That concludes my comments today. Let me turn the call now over to Paul Lytle, Chief Financial Officer, who will discuss the Company's financial performance, including additional details regarding our Avid Bioservices business. Paul?

Thanks, Joe. We are pleased to report that our manufacturing operation continues to experience substantial revenue growth, with a five-year compounded annual growth rate of 39% and year-over-year growth of 66%. It's also important to note that this revenue was entirely derived from our Franklin facility, which is our first manufacturing facility.

Looking ahead, we have positioned the Company for continued revenue growth with the launch of our second manufacturing facility that was commissioned in March of 2016. With these two operational facilities we are projecting manufacturing revenue of $50 million to $55 million for fiscal-year 2017. This projection is supported by a current revenue backlog of $68 million under committed contracts, covering services to be completed during this fiscal-year 2017 and into fiscal-year 2018.

Now turning to the fourth quarter of fiscal-year 2016, we generated contract manufacturing revenue of $18.8 million, representing a 102% increase in revenue compared to the same prior-year quarter. For the fiscal year 2016, we generated manufacturing revenue of $44.4 million.

Our corporate goal of reaching profitability in 24 months, it is critical that we continue to grow our contract manufacturing business. For this reason, and coupled with the high demand for manufacturing services, we are planning to construct a third manufacturing facility focused on products in clinical development. We believe the third manufacturing facility will again significantly increase our manufacturing capacity, and all three facilities will have the potential to generate in total approximately $110 million in annual revenue.

As we execute on our plans, we have secured a 25,000 square foot building in close proximity to our current campus, and we expect the new clinical suite to be complete and ready for clinical manufacturing activities by mid-2017.

Now turning to expenses, cost of contract manufacturing increased during the current quarter and fiscal year in relation to the increase in revenue. In addition, we saw R&D expenses for fiscal-year 2016 increase to $59.5 million, or 38% compared to fiscal-year 2015. This expected increase was primarily due to increased manufacturing costs associated with preparing bavituximab for commercial production, combined with the increased cost associated with the Phase III SUNRISE trial and the two previously planned Phase II trials in breast and lung cancers.

As we look ahead, our R&D strategy has changed. We are focusing our internal drug development efforts on small, cost-effective, early-stage clinical trials designed to attract potential partners to further advance our products. We believe this strategy will not only help us achieve profitability sooner, but it will also create significant potential upside for our shareholders.

As we execute on the strategy, our goal is to reduce spending by approximately 50% this year in R&D. With that being said, it's important to highlight that we will continue to incur significant costs this fiscal year to wrap up the Phase III SUNRISE trial and to analyze the underlying data. This is an extremely important endeavor that could potentially help us drive both future partnering interests and our future development plans.

Now turning to G&A expenses, we saw a slight decline in G&A quarter-over-quarter, while G&A remained relatively flat year-over-year, decreasing 1%. A more detailed analysis of our statement of operations is included in our Form 10-K that will be filed later today.

This concludes my financial overview, and I will now turn the call back over to Steve for his closing comments. Steve?

Thanks, Paul. It was our goal today to convey the progress that we're making in each area of our business. Our contract manufacturing business is thriving and growing, and we are projecting record revenues between $50 million and $55 million for next year. We also plan to open a new clinical bioprocessing facility in 2017 that we expect will further extend our revenue potential for the Avid business.

Our collaborators are advancing, setting the stage to generate considerable amounts of biomarker, translational, and clinical data. The goal of these studies is to demonstrate the bavituximab mechanism of action in combination treatment settings and attract partnering opportunities.

And lastly, we've in-licensed a new exosome technology for a minimal cost that leverages our existing in-house expertise and provides us with another opportunity for us to create value through product development. Together, we believe this strategy will provide success, as it will allow us to focus the majority of our resources on achieving our primary corporate goal: future sustainable profitability within 24 months.

At the same time, we will focus our R&D efforts on small, early-stage trials and development of the exosome technology in an effort to attract partners. We believe this strategy will allow us to build near-term revenues through Avid while maintaining the potential for significant additional value creation associated with our R&D efforts.

This concludes our prepared remarks, and we would now like to open the line for questions. Operator?

(Operator Instructions) Joe Pantiginis, ROTH Capital Partners.

Like to start on the exosome program, if you don't mind. First, I guess a more general question is: Can you go into a little more of the utility and depth of the program, with regard to how it might be differentiated from other cancer diagnostics?

And then secondly, a little more specific to Jeff's comment, if I heard you correctly there are some exosomes that are PS-expressing in normal individuals. So can you talk to work that might be needed to identify relevant thresholds? Or has that been done already? Thanks.

Sure, Joe. So really maybe your second question first. We have looked at -- in normal individuals. It's very -- a low incidence.

And certainly we know from our other R&D work that there is PS-positive exosomes in viral infections. Whether that has to be an acute infection that's blood-borne is another issue.

So I think to answer your question, we are looking at that possibility, understanding that there are going to be interferences and false positives. But I think what we're really impressed around is really the false-negative rate at this point. And so, that's where we want to make sure we don't deliver the wrong message to a patient with an assay like this.

Yes, I think just to extend on that, so I think the -- what made this attractive is of course that PS is the target for our lead clinical compound bavituximab, so we had really a large amount of knowledge in targeting this molecule and agents that bind to it. And so it really fit into our wheelhouse.

And obviously the fact that it goes after the same target as we're targeting with bavituximab gives it that potential of really adding to the clinical program as a potential -- sort of like a liquid biopsy that would allow you to test blood samples for potentially the presence of your target and then correlate that with patient outcome. So that's going to take some work to do and upcoming studies, and we're evaluating what we can do with samples that have already been collected; but that makes it attractive in and of itself.

I think just from a standalone development, what drew us to this technology was just really how clean it has been in the ability to differentiate between healthy individuals and those with various stages of cancer. And as Jeff said, so far the false negative and positive rates have been pretty outstanding.

So it is work in progress, but again it fits right in with -- we're not having to hire additional people, we're not having to bring in additional equipment. This really fits in with everything we're doing on both the studying PS as well as on the assay development side of the business.

And we think it actually is going to be complementary. There are other technologies out there looking at exosomes. They are all taking a very different approach to what we're doing, and we actually think they could be very complementary to each other. So we also see a need, even as interest in exosomes begins to pick up, to actually utilize this in conjunction with other things that are in development.

No, thank you; that's helpful. And if I could just switch quickly to Avid, with regard to your third facility, how will the size of this facility relate to the other ones that are currently in place, obviously? And what kind of costs are you looking at to bring it up to speed?

Yes, it will be a smaller facility. It's really geared toward clinical-stage products, and so we don't need as many, if you will, bells and whistles that go along with it.

That will help save a lot of space. So the construction cost we expect to be much less than, for instance, the Myford facility which was the commercial facility we recently commissioned.

Again, I think the good news here is that we already have a backlog of business to go into that facility. And it's going to really allow us, we think, to capture even more business over the coming months as we finish up the facility and can bring then customers into what will be a, if you will, almost like a miniature version of our commercial facility we just commissioned.

So that they can come in, they can be in the same equipment, and as they advance through clinical development toward commercialization we could then transition them over actually to one of our commercial facilities. So it creates a lot of continuity for the customers coming in. And it's really -- I think it has already received a lot of interest, and so we're excited about getting it up and running.

Okay, and maybe one last quick question if you don't mind, just on SUNRISE. Maybe for Joe. Joe, obviously -- and you guys mentioned that patients are still able to receive bavituximab, and I don't want to belabor the study at this moment, because you have to compile all this information.

But since patients are still on drug, are you getting anecdotes from physicians that you are seeing some longer-term survival based on the potential immunotherapy tail?

Yes, I think the data is continuing to come in, and I think that is reasonable a conclusion that there is obviously patients that are on therapy a long time. So I think we're right now focused on really trying to identify characteristics of those patients that are benefiting the most from bavi.

I think the biomarker analysis is really going to help provide a lot more clarity and information. So yes. I think we anticipate some results for you soon.

Sure. Thanks a lot, guys.

Kumar Raja, Noble Financial.

I just wanted to ask about -- are there any differences in PS expression in cancers? Especially the magnitude. Like, are there some cancers where you have higher expression compared to others?

And also this licensing, what IP does this cover? Like, is there already existing IP on this, or you guys need to file a patent from this technology?

Sure. Yes, I think it's always been a bit of an open question, what you asked, so it's a good question. Because you can't just take a tumor out and slice it and then take a look at what's inside the tumor, because there's PS inside of every cell. So it tends to give you a lot of background when you try to do histological analysis and what have you.

So I think that we're hopeful that we can actually, utilizing this new test, be able to monitor through blood samples actually how much overall PS-positive microparticles and tumor cells there are throughout the patient. And that could really be a big benefit in understanding maybe which -- correlating that with which patients do well and which patients don't do well.

So at this point I think it remains an open question, but we think this could be actually a very nice tool to use in conjunction with that. So that's really one of our key goals, is to be able to now implement this in our own clinical studies and get first-hand knowledge of the raw magnitude of PS exposure and how that relates to actually not just bavituximab treatment but also other IO agents.

Because one important thing to keep in mind is that PS-positive microparticles are immunosuppressive, and so there actually could be a nice correlation between this particular blood marker and outcome on other treatments as well, because they may really portend to a more immunosuppressive environment, and those may be the patients that don't do as well, for instance. So we see a lot of utility for this, and we think it just can really be used in conjunction with a lot of different types of tumors as well as different treatment modalities.

And filed IP is included in the UT license that we (technical difficulty) put together.

Okay. Just one more question. Like, you guys touched upon the Memorial Sloan combination trials. Are there any specific combinations where you are seeing increased response versus others?

I think we're seeing good activity in combination with multiple different types of reagents. Obviously we're very interested in IO agents, but it does extend beyond that as well to combinations with not just the PD-1, PDL-1s, but also agonists as well as the antagonists.

In addition, a lot of interest in combinations with things like radiation. Radiation almost acts like an adjuvant, and so that's an attractive combination.

I think across the board they haven't really zeroed in on one particular area that's outshining the others at this point. But I think as we go on that's certainly the hope, is we'll see those combinations that really just pop and give us the best results.

Jeff, I don't know if you want to --

Yes, I think just to extend that, what we are seeing is that -- and early our contention was -- is that PS-targeting agents really operate outside of these downstream checkpoint inhibitors. So I think the evidence that we are seeing with such varied and breadth of combination responses reinforces that idea that we are really affecting an immune-suppressive element, and reversing that really helps, benefits these other type approaches, whether it's a T-cell agonist or a checkpoint inhibitor or antigen, presenting antigen with radiation therapy.

Okay, great. Thanks for taking my questions.

Thomas Yip, FBR.

Congratulations on a very impressive quarter from Avid, and also on your newly acquired exosome technology as well. First I'm just wondering regarding your exosome technology. You've set a timeline of now to, within 18 months, to generate -- at the most [malval] from this program. And I'm assuming that means the endgame is to out-license a finished diagnostic test.

Can you just outline for us some key steps that you would need to achieve within 18 months to reach that goal?

Yes. I think short-term goals -- and actually the group's already been working on this. One thing to keep in mind is that we do have a research collaboration with UT Southwestern, so we didn't just start looking at this technology this morning; we've been working on it for quite some time.

And again, it was such a nice fit with what we do already, because we already in-house have a lot of PS-finding agents that we've evaluated. So we already had a lot of the base raw materials to work with.

So right now the primary goal is to really optimize the assay to achieve the best sensitivity that we can, as we go into testing patient samples. So a lot of work on just designing the format of the assay so, again, that we can have the lowest noise and really be able to detect levels of PS exosomes in patients.

The next step would be to really validate that through patient samples. The beauty of this is that while you do need IRB approval, of course, you're not running really clinical trials. So this can be done in conjunction with either our own ongoing trials, our partners' trials, or there's many other sources of just receiving these types of blood samples. So it gives the ability to really quickly go through and test even hundreds or thousands of patient samples as part of the validation process.

And then we really feel like at that point we can zero in on what are the potential applications of the technology, of course outside of what we might do with our own PS-targeting programs, but really with the potential utility of this for patients. And then really our goal is not to become a diagnostic company, but to put this in the hands of a good organization that's already established in the diagnostics area and then have them finish up the commercialization and expansion of the utility of the actual assay itself.

Our benefit at that point would become hopefully some residual royalties, milestones, and what have you so it actually again then feeds back into our revenue goals of becoming profitable. So we saw this was a very attractive technology that just fit right in with what we're already doing and requires almost no additional resources whatsoever.

That sounds good, and thanks for the details. Regarding the preliminary data that you already have for exosome, will there be a formal presentation sometime this year? Or when should we expect to see more preclinical data on this front?

Yes, I think our goal is probably toward the end of this year to be able to start -- be in a position to have data that we can present. And again, I think that will come in a lot of different formats.

It will be in conjunction with other ongoing studies that may be taking place already. Could be standalone just on the diagnostic itself.

So yes, I think you'll be hearing a lot about this. And it's one of the reasons we wanted to get this news out there, is because we do think sooner than later we'll be able to talk about this technology.

Okay, that sounds good. My final question, regarding finance: just want to confirm that we should expect R&D in fiscal-year 2017 to be lower by a little bit. And if so, does that account for the new facility manufacture -- new facility ramp-up?

Right now for R&D our goal is to basically take our R&D spending from fiscal-year 2016 and reduce that by 50%. All the activities that are related to our manufacturing operations goes into cost of goods or G&A-type expenses. But our goal is really to take this new approach -- running smaller, earlier-stage proof-of-concept type trials -- to build value in the program. And we think we can do that including -- and by reducing our R&D spending by 50% this year.

Yes, and I think it's important that in that reduction -- I mean wrapping up SUNRISE still has been a significant portion of the R&D budget. So obviously as that wraps up and we close out the databases and get final data from the study, then I think you'd probably get a little bit more true view of what we expect the R&D spend to be. But I mean, as Paul said, I think the goal here is really different types of studies that can still answer very critical questions, run those in conjunction with our partners, generate data that will then bring on that marketing partner that can then really help bear the burden, going through into finishing up and into commercialization.

So yes, I think as we wrap up SUNRISE you should see the R&D expenditures really significantly go down. Then again we think it will be a little bit more of a steady-state after that.

Okay, thanks for the clarification and thanks for taking my questions. I'm looking forward to more details from exosome.

George Zavoico, JonesTrading.

Thank you and hi, everyone; good quarter on the Avid. That's impressive growth, so I want to start with that first.

In the -- I noticed you're calling it a CDMO rather than a CMO, which is distinctive. And I guess Rob certainly alluded to that through his experience.

Do you see this as adding additional value to clients? Is it an add-on that you would then put a premium, additional premium cost to it, rather than just providing API? How are you going to leverage that CDMO?

Yes. I think CDMO is a relatively recent term that's been used by a number of organizations that offer more than manufacturing services, and I think that's really what it's supposed to indicate. I think in our case it is really quite broad, because we do have drug development experience; we have the ability to do regulatory filings, regulatory document preparation.

Really top to bottom we -- from a CMC side especially, we have the ability to basically almost be their entire manufacturing arm. So I think that's really where the customers are seeing the value, is that we're not just offering a service and they tell us what to do and we do it. But we actually get to add a lot of value along the way through our knowledge of what the regulatory bodies expect both in the US and abroad.

Again, I think over the long run this is going to end up being opportunities for not just services but actually for partnering. Because this is a service and these are capabilities that almost no small companies have that we, again, have a lot of experience with.

So I see it as phenomenal opportunity to continue to expand the business well beyond just bulk drug substance into a lot of different areas of development. Rob, I don't know if you want to add to that.

Good points, Steve. We have a lot of expertise, for example, in our [robust] strategies (technical difficulty) which are very complicated and something that most small development companies who might enjoy such an opportunity would have very little experience with. So by bringing and leveraging our analytical, our manufacturing, our regulatory capabilities, this is really kind of unique.

I think most companies would really, really like to take advantage of that, because it allows them to leapfrog their competition and bring their drugs to market much earlier. So again, I really think we're in a fantastic position with respect to that.

And as Steve said, some of these companies who are flush with money and yet don't have this expertise might well want to consider a partnering opportunity as a way of speeding up and financing the drug's development.

Yes, and I think in conjunction with that when we think about expanding our offering, it's more than just new drug substance facilities, but also could extend into small fill/finish to help out particularly our clinical-stage customers with their needs. It could extend eventually even into things like antibody drug conjugates which is, again, something we have a lot of in-house expertise working on.

So I think there is a lot of opportunity here where we see market need from our existing clients, and they are actually having trouble finding the services that they so desperately need. So we see a lot of opportunity, and it's all based on demand from customers who (technical difficulty) saying: Can you do this?

I think that's really the exciting part. We're not building things we're hoping people will come to, but really things that people already are asking us for.

Actually you alluded to my next question, which was -- the only thing you don't provide yet will be -- is fill-and-finish. So are you making room in your third facility to perhaps provide that service?

Yes, we're looking that that as part of the new facility like I said, particularly for clinical-stage products. Because we see it as such a big burden on the clients to -- they've got to arrange runs with us, and we've got a release it, then they've got to have a slot open. If there is any sort of movement of the timelines it's a real hassle for them.

So we think that would be a major draw for actually bringing in new business. And again, our goal with the new facility is it's almost like the funnel that leads into our commercial facilities, which is where we can make a lot of revenue progress and basically feed as many people in the clinical so we get those coming through that are successful in the commercial facilities. And that really we think is the key to growing a long-term successful business.

But yes, fill-finish is definitely high on the list. And again, this is just because our clients are just clamoring for something that would be much easier for them to manage.

That's great. But it also means that now you're doing development consulting services basically, and some of the expertise lies -- doesn't really lie in Avid; it lies in Peregrine. So that means that Rob, Jeff, Joe would be going back and forth across the two divisions of the Company as needed. Is that correct?

Absolutely. Yes, and in fact that's already happening. We're already finding the -- we have so much expertise across the board.

And again, the customers have just really reacted very positively to having that additional expertise available, because again either they have it in-house -- and a lot of them just don't have that particular expertise in-house -- or they have to go out and hire a consultant. And it's easier for them if they can work with kind of a one-stop-shop that provides them with everything they need, and then they have to limit the number of different groups they have to work with.

Yes. Sometimes it's always better just to get another opinion on a question that needs answering in the manufacturing process.

Yes, absolutely. I think the biggest thing that sets us apart there is really our knowledge of the regulatory bodies and what their expectations are. Because in particular that's a huge benefit for the clients. As they're making process changes or filings overseas it's really an area where we can help them out a lot.

Okay, thanks for that. Then a couple questions about the exosome, two questions. First, can you say, maybe you can't, but what you're budgeting for that?

And the second part of the question (technical difficulty) was this -- actually I have two questions. The second one is that you've already done imaging of PS for many years now with fluorescent or otherwise tagged bavituximab antibodies. So the first part of that question is: Is this exosome technology antibody-based?

And the last question is that you're entering rather a competitive and very interesting space for liquid biopsies. Do you see this competing or being supplementary to measuring circulating T-cells or circulating tumor DNA?

Yes, we view this as being very complementary to other technologies that are being developed. That's one thing that made it very attractive. I think the ease of collecting samples would put it way ahead of an imaging agent because those -- by their very nature you've got to put something in, take scans; it's long days for the patients, whereas this is a simple blood draw from a patient perspective and then the results come in.

But I think we see this as a very interesting space just because, again, we know that the PS exosomes are going to be immunosuppressive. So just the ability to correlate this with overall immune status of patients, there's a lot of utility of this technology we think that can be brought to bear, not just for bavituximab but for a lot of other IO type technologies. So we think it can be very nice to pair that up with the other types of analysis that are being done with looking at putting T-cells or other immunostimulator cells or even T-regs and how do they correlate with a simple test.

And then is it antibody-based? Or -- and comment about the budget if you can.

Yeah, we can't really --

Capture based.

Yes. We can't really say at this point because we want to make sure we get the appropriate amount of protection around it. But as you know, we have all kinds of agents that bind to PS. We've got beta bodies; we've got antibodies; we've got all kind of things that bind to PS.

That was the beauty of this technology, is we really understand it really well because we've already studied it. We've already made all the reagents. So, I think we're in a great position to really quickly move this forward to proof-of-concept.

Okay, terrific. Thank you very much.

Joe Pantiginis, ROTH Capital Partners.

Thanks for taking the follow-up. Just to focus on Avid for a second, since that's the re-focus of the Company for the moment, maybe a question for Paul with regard to COGS. Is this something that you think you can improve upon, or is this standard operating types of cost of goods because of the individual runs, because of your clients? Or how should we view it as your facilities expand?

Yes. Just to put a little history here, our cost of goods last fiscal year was about 42%. This past fiscal year we improved that to 48%, and it really depends on the mix of services and the mix of activities that are currently ongoing.

I can say that our new Myford facility does have a slightly higher cost of goods, because we've got an asset there that needs to be depreciated every month. So that contributes to the cost of goods of that facility, whereas our pre-existing Franklin facility has been fully depreciated for some time. So I can say that.

Our goal overall is to maximize, basically, our gross margins from his business, and we're really geared towards doing that. But other than that, we really can't predict what the COGS are, because it's really based on the mix of services there that are within the facility.

No, absolutely. No, that's very helpful, Paul, thanks a lot and thanks for taking the follow-up.

I'm not showing any further questions. I would now like to turn the call back to Mr. Steve King for any closing remarks.

Okay. I'd like to thank you all once again for participating in today's phone call. As always, I want to thank our stockholders for their continued support. And I would like to especially thank our patients, their families, and the investigators that are participating in bavituximab clinical trials.

With that we will now conclude the call. Thank you.

Ladies and gentlemen, thank you for participating in today's conference. This concludes today's program. You may all disconnect. Everyone have a wonderful day.